However, analyst Louis Gerhardy remained somewhat guarded for now as the maker of wireless-communication chips used in devices like mobile phones continues to face some challenges.

Shares of Qualcomm
QCOM, -0.95%
rose 44 cents, or 1.1%, to close at $39.21. Shares rose as high as $40.21 during the session following the upgrade. The stock, which ended that prior session off 8.6% for the year, has ranged from $32.08 to $44.99 over the last 52 weeks.

Gerhardy lifted his Qualcomm rating to equal-weight from underweight, saying its total return over the next 12 to 18 months is likely to be in line with the other semiconductor stocks he follows.

Yet, fiscal 2006 is likely to remain volatile for San Diego-based Qualcomm, the analyst said, pointing to the ramp-up to third-generation, or 3G, wireless devices and to challenges the company faces on the intellectual-property front, among other factors.

However, Gerhardy said he didn't consider going to an overweight rating in light of the stock's valuation, "a few risks and our view that the 3G sweet spot and the potential for a strong of positive earnings revisions are still about a year away."

"We believe investors have already started to anticipate a string of positive earnings revisions for the company," he said.

As for valuation, Qualcomm's stock trades well above the analyst's estimated present value based on future cash flows of between $29 and $32, he pointed out.

"We do not believe the 3G-induced positive earnings momentum is right around the corner, and we expect such positive momentum to become possible in the second half of 2006," the analyst commented in a note to investors.

Moreover, Gerhardy said that with broad-based positive sentiment for the stock, "investors will continue to find modest downward revisions [to expected earnings] as an opportunity to buy the stock."

Most investors expect low-priced handsets based on WCDMA technology to become available late this calendar year, but the handsets won't be available in high volumes until the middle of 2006, according to Gerhardy.

Meanwhile, Qualcomm could face hurdles as major mobile-phone makers like Nokia Corp.
NOK, -0.17%
challenge the royalties they pay to the company.

Qualcomm, which pioneered the code-division multiple access wireless technology used mostly in North America, gets a large chunk of its revenue and profit through the licensing of its wireless technology.

Nevertheless, the prospects for upward revisions to earnings expectations -- needed to drive the stock higher -- appear "encouraging" in the second half of 2006.

But by the same token, "the timely availability of low-priced handsets, carrier execution, and IP [intellectual property] challenges must be navigated successfully," Gerhardy asserted.

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